Is an S-corp election worth it in Georgia?

Work it out on your own numbers

The figures below use $100,000 of profit and our standard assumptions. Put your own in instead, this compares staying a sole proprietor against electing, with Georgia's own charges on the company included:

What the election is worth on $100,000 of profit

A single filer taking the standard deduction, paying themselves 40% of profit as salary, with $1,500 a year of payroll and filing cost:

The profit range where it actually pays in Georgia

From about $20,000 of profit upwards. Below that, the $1,500 of payroll cost is more than the saving.

What Georgia does differently

Georgia taxes the profit either way. Whether you take it as self-employment income or as salary plus distribution, roughly $5,190 of Georgia income tax sits on $100,000 of profit, the election moves the payroll-tax half of the bill, not the state half.

Georgia is one of 31 states with a pass-through entity tax. Entity pays state tax on behalf of owners. Owners get state tax credit on their personal return. The entity-level payment is deductible as a business expense, bypassing the $40,400 SALT cap. That is a genuine reason to elect beyond the payroll-tax saving, and it is not in the figures on this page, the calculation below is federal payroll tax against Georgia income tax as an individual.

The Georgia detail

Georgia honours the federal election but every nonresident shareholder must sign a consent agreement (Form 600 S-CA), failure terminates the Georgia S election and the corporation is taxed as a C corp. Georgia also levies an annual NET WORTH tax via Form 600S: nil at net worth of $100,000 or less, rising to a $5,000 maximum above $22 million.

How much salary to pay yourself

Less salary means less payroll tax, so the arithmetic always points at the smallest salary you can justify. That is exactly why it is not a number to optimize: compensation has to be reasonable for the work you do, and the penalty for getting it wrong is reclassification plus back payroll tax. The cheapest row here is the riskiest one.

What this assumes

• Single filer, standard deduction, the business as the only income.
• 40% of profit taken as salary in the headline figures.
• $1,500 a year for payroll and a separate 1120-S, a cost estimate, not a tax figure, and it varies by provider.
• Comparing against a sole proprietorship. If you already trade through an LLC, some state fees are owed either way and are not a cost of electing.
• Anything listed as not modeled above is genuinely owed, it is excluded because it does not depend on profit, not because it is nil.

What these words mean

Nonresident

Someone who earns money in a place without living there. Most states and cities tax non-residents only on what they earned inside the boundary, and residents on everything.

Pass-through

A business that pays no tax itself, its profit passes through to the owners, who pay tax on it on their personal returns. S corporations, partnerships and most LLCs work this way.

Entity level

A tax charged to the company itself, before any profit reaches the owners, as opposed to a tax the owners pay on their own returns.

Net worth tax

A charge based on what the company is worth on paper, its assets less its debts, rather than on what it earned. It is owed by profitable and loss-making businesses alike.

C corporation

A company taxed as a separate taxpayer in its own right, so profit is taxed once to the company and again to the owner when paid out. The thing an S corporation election is meant to avoid.

Distribution

Profit paid out to a company’s owner that is not salary. It is not subject to payroll or self-employment tax, which is the whole point of the S corporation election. And why the salary has to be defensible.

Related

• S-corp calculator (all states)
• 1099 taxes in Georgia
• Quarterly payments in Georgia
• S-corp in Alabama
• S-corp in Florida
• S-corp in North Carolina
• S-corp in South Carolina